Spotify (NYSE: SPOT) reported its third-quarter 2024 earnings with a blend of record-setting achievements and areas falling short of market expectations. While the Swedish streaming giant missed analyst revenue and earnings per share estimates, its guidance for Q4 profitability and robust user growth bolstered investor confidence, propelling the stock up 7% in early trading.
Total revenue for Q3 2024 rose by 19% year-over-year to €3.99 billion (C$5.90 billion), up from €3.36 billion (C$4.97 billion) in the same quarter last year. Despite this growth, revenue came in below analyst expectations of €4.02 billion (C$5.95 billion).
The shortfall underscores Spotify’s exposure to currency fluctuations, as adverse exchange rates reduced revenue growth by about 270 basis points—significantly more than the 100 basis points impact the company had anticipated. On a constant currency basis, revenue grew by 21% year-over-year, but currency effects ultimately dampened the results.
The Premium subscription segment, Spotify’s primary revenue source, saw revenue increase 21% year-over-year to €3.52 billion (C$5.21 billion), up from €2.91 billion (C$4.31 billion) in Q3 2023. This increase was driven by a 12% rise in Premium subscribers, reaching 252 million, and a 9% growth in average revenue per user (ARPU). While ARPU grew by 11% on a constant currency basis, reported ARPU growth was limited to 9% due to currency effects, showing the ongoing impact of exchange rates on Spotify’s core revenue streams.
The ad-supported revenue segment, though smaller than Premium, grew 6% year-over-year to €472 million (C$698 million), up from €447 million (C$662 million) last year. However, this performance lagged behind Spotify’s target growth rate of 7% on a constant currency basis.
Weak ad pricing, particularly in podcast and music ads, contributed to the slowdown, as economic uncertainty prompted advertisers to pull back. Although the ad-supported gross margin improved by 486 basis points to reach 13.1%, this segment is significantly less profitable than the Premium offering and has limited impact on Spotify’s overall profitability.
Spotify reported a gross profit of €1.24 billion (C$1.83 billion), a 40% increase from €885 million (C$1.31 billion) in Q3 2023. The company’s gross margin reached an all-time high of 31.1%, up 473 basis points year-over-year, due to efficiencies in both the Premium and ad-supported segments. By comparison, Spotify’s gross margin in Q3 2023 was 26.4%.
Operating income surged to €454 million (C$672 million), a significant increase from €32 million (C$47 million) in the same period last year. The operating margin also rose from 1.0% to 11.4%, supported by an 8% reduction in total operating expenses, which fell to €786 million (C$1.16 billion). This decrease was largely attributed to reduced marketing and personnel costs, though it was offset in part by a €54 million (C$80 million) charge related to stock-based compensation, driven by a higher share price.
Free cash flow reached a record high of €711 million (C$1.05 billion), up from €211 million (C$312 million) in Q3 2023, reflecting the company’s enhanced cash generation. This cash flow performance strengthened Spotify’s liquidity, raising its cash and cash equivalents balance to €6.1 billion (C$9.03 billion), up from €2.6 billion (C$3.85 billion) a year ago.
User growth remained robust but showed some signs of deceleration. Monthly active users (MAUs) increased by 11% year-over-year to 640 million, up from 574 million in Q3 2023 and from 626 million in Q2 2024, reflecting a net addition of 14 million MAUs in Q3. Spotify’s Premium subscriber base also grew by 6 million quarter-over-quarter to reach 252 million. This growth aligns with Spotify’s strategy to prioritize high-margin subscribers, though maintaining double-digit growth amid competitive pressures could become challenging.
For Q4, Spotify’s guidance suggests cautious optimism. The company expects operating income to reach €481 million (C$711 million), exceeding the average analyst forecast of €432.7 million (C$640 million). However, Spotify’s revenue forecast of €4.1 billion (C$6.07 billion) fell short of the market consensus of €4.26 billion (C$6.30 billion), signaling continued vulnerability to currency fluctuations and uncertainties in the ad market.
The company projects MAUs to reach 665 million and Premium subscribers to rise to 260 million by year-end, reflecting ambitious targets that rely on steady user acquisition and ad revenue growth. Any economic downturns affecting user growth or ad spending could jeopardize these projections.
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